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How To Trade Forex In Bear Market
Sometimes we find ourselves asking - is this a bear market? What do I do next? The confusion and uncertainty definitely take stronger presence during the bearish times, compared to the bullish ones. But Forex is completely double-sided, meaning that traders can equally profit from either price direction. Today we are going to discuss how to trade in a bear market and what you will need along the way.
What does bear market means
Many new traders confuse bearish trends with a bear market and this is where their biggest mistake is. If you look at the way prices move on Forex, you’ll see that the direction keeps changing, and no matter how many green candles there are on the chart, there are always some red ones in the mix. However, even the harsh down trends are not considered full-on bear markets.
Forex bear market is a scenario when the value of an asset in question has been drastically falling for an extended period of time. Generally, the fall down of 20% is considered a bear market. And the 10% decrease will usually define the state of market correction. What is important to understand is that Forex market bear traders have the same chances to profit as bull traders on the bullish markets.
Bulls and bears in the market
The most basic explanation of these animalistic terms is: bulls are buyers, bears are sellers. Since Forex is an exchange marketplace, every transaction consists of someone buying and someone selling, or in professional terms - someone going long and someone going short respectively.
The power of bulls and bears is expressed through the amount of traders currently taking this position. When the quantity of short positions add up, the movement becomes bearish. This is explained by the fact that both bull and bear market sentiment creates traction by a very simple principle: “everyone is selling, maybe I should sell too”. This is very reasonable and serves as kind of the basis for the price movement in the first place.
Every trader can switch between being a bull or a bear constantly, because in order to sell, you need to buy. But the decision on whether you should be on the red or the green side at the moment is a little harder to make. This is where the trading strategies come in handy.
Bear market trading strategies
Adopting an effective trading strategy is very important on Forex. Strategies help us evaluate the situation correctly, compare the options and decide on how to act. Traders choose strategies based on their individual financial capabilities, trading style preferences and overall expectations.
There is no single answer to which bear market trading strategy is the best, because each one of them will work for some traders and not work for others. Day trading in a bear market, for example, can provide some minor short-term victories and allow traders to minimize risks by closing the positions before the day runs out. On the other hand, investor type traders might take the bear market as an opportunity to make a big purchase with hopes to sell it later after the market recovers.
The main takeaway on how to make money day trading in a bear market is the same as for any other strategy: make sure you are choosing the correct methods of dealing with the situation. This includes checking if the strategy you prefer is suitable for the current scenario and implementing several risk managing techniques to cover all fronts.
Fast-moving bear market
Any fast-moving market can be stressful. And the bear market adds up on the stress with overall panic of everyone involved. In order to avoid making rash decisions and profit the most, consider following these bear market trading tips:
Always confirm that the market is in fact bearish, before implementing any bear oriented strategies.
Take advantage of pending orders to keep the undesirable scenarios from affecting you. It is generally advised to focus on setting up multi-leveled stops in order to optimize every trade, especially in a fast-moving bear market.
Technical analysis techniques and tools are effective in all kinds of markets. The indicators you used to trade during bullish conditions are going to work just as fine under bearish or mixed circumstances.
Fundamental analysis is important in bearish markets as it usually gives a good reason for why everything is happening. Fundamentalists believe that as long as we see the exact reason, we will be able to effectively predict the possible outcome and take appropriate measures.
Practice trading under bearish conditions in demo, if you have only been trading on bull markets before. Demonstration accounts are a great help for traders who have not yet decided which strategy to adopt and what techniques to implement.
As you can see, trading Forex bear market is very straightforward and requires roughly the same as trading bull market. Pay attention to the chart, experiment with your approaches and look out for the signs of reversal. Everything else will come with experience.
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